No State Income Tax
One of the most notable aspects of Tennessee's tax system is the absence of a state income tax. This means residents do not pay taxes on their wages or salaries, making Tennessee one of only eight states that don't collect income tax. The Hall Income Tax, which previously taxed interest and dividend income, was fully repealed as of January 1, 2021, further solidifying Tennessee's position as a tax-friendly state.
Sales Tax Structure
Tennessee compensates for the lack of income tax with one of the highest sales tax rates in the nation. The state sales tax rate is 7%, but local jurisdictions can add their own sales taxes, leading to combined rates that can reach 9.75% in some areas.
Local Sales Tax Limitations
- Maximum local rate cannot exceed 2.75%
- Combined state and local rates cannot exceed 9.75%
- Local rates must be approved by voter referendum
Sales Tax on Groceries
Tennessee imposes a reduced sales tax rate of 4% on groceries, with local taxes potentially adding to this rate. This affects the overall cost of living for residents.
Property Taxes
Property taxes in Tennessee are relatively low compared to the national average. The state does not levy a property tax; instead, taxes are assessed and collected at the local level. The average effective property tax rate is approximately 0.64%.
Property is assessed at different percentages of its value based on its classification. Residential property is assessed at 25% of its value, while commercial property is assessed at 40%.
Property Tax Relief Programs
- Elderly Homeowner Program
- Disabled Homeowner Program
- Disabled Veteran Program
- Tax Freeze Program for seniors
Business Taxes
Tennessee imposes several taxes on businesses:
- Franchise Tax: 0.25% of the greater of net worth or real/tangible property (minimum tax of $100)
- Excise Tax: 6.5% of net earnings from business conducted in Tennessee
- Business Tax: Graduated tax based on classification and gross receipts (0.02% to 0.3%)
Special Taxes and Fees
Fuel Taxes
- Gasoline: $0.26 per gallon
- Diesel: $0.27 per gallon
- Additional fees may apply for environmental and inspection purposes
Sin Taxes
- Cigarette tax: $0.62 per pack
- Mixed drink tax: 15%
- Beer tax: $1.29 per barrel
Impact on Residents
Advantages
- No state income tax on wages
- Lower overall tax burden for high-income earners
- Relatively low property taxes compared to national averages
Disadvantages
- Higher sales tax burden affects lower-income residents disproportionately
- Limited public services due to reduced tax revenue
- Higher costs for basic necessities due to sales tax
For more detailed information about specific tax rates and regulations, visit the Tennessee Department of Revenue website.